150 wealth-Creators

Equity markets in 2018 have been extremely tough on investors. Investors were frustrated not only because the broader markets did not perform, but also because among the large-caps, only a handful of stocks delivered satisfactory results. There was hardly any place to seek refuge in the markets in 2018 and that has dampened the spirits of investors a little bit.

So far, the market story has been akin to that of CY2018. The large-caps are faring better than the mid-caps and small-caps, even though the latest trading sessions in the market are showing signs of narrowing the performance gap between the large-caps and mid/small-caps.

Indeed, it is only a small number of stocks that are pushing the markets higher in 2019 so far. Will the narrative change in 2019? What are the chances of the broader markets starting to contribute and cheering the investors? To find answer to these questions, it would be useful to look at the market data for the last 10 years.

Midcap revival is on the cards. The relative valuation of mid-caps versus large-caps are at a historically low level, with 7 DMAs at 2014 levels. Moreover, the rolling one-year return difference between mid-caps and large-caps are at a historical extreme of -22% versus average of 4.4%. We believe valuations are compelling at these levels for a revival in the performance of mid-caps, particularly the quality mid-caps which have also taken a substantial beating. Elara Capital

If we look at the above table, we find that on an average, at least 1471 shares have given positive returns every year. The average number of stocks that have delivered 15 per cent and more in one year is 1205, while the average number of stocks that delivered 25 per cent and more returns in one year is 1049. As many as 744 stocks have on an average generated returns in excess of 50 per cent, while the number of stocks that have delivered more than 100 per cent returns on an average in one calendar year is 392.

In the past ten years, the difficult years for investors have been 2011-12, 2013-14 and 2018-19. These are the years where the number of stocks that gave positive returns were low. What is interesting to note is that in the immediate years following those difficult years, the number of stocks that gave positive returns has drastically increased. This data makes us believe that 2019 may be a year where the broader markets perform much better than they did in 2018. The broader market participation in 2019 will remain a key not only to individual investors' performance and their confidence, but also for the improvement in the performance of mutual funds. With improvement in the mutual fund performance, one can expect more money to flow into equity MF schemes.

Amar Ambani, President & Head of Research, Yes Securities

"Next 3-4 Years Belong To Financial Assets, Not Physical Assets"

What is your outlook on the markets for 2019?

I am very bullish on the market outlook in 2019. Firstly, the broader market has bottomed out and the margin of safety is high. Next, many variables are in favour. Inflation is structurally weak and another repo rate cut is on the cards. The commodities are in a bear phase and are unlikely to rise to alarming levels for 4-5 years. Rupee overvaluation has been sharply reduced, so further depreciation will only be gradual. Last quarter’s revenue growth was the highest seen in five quarters and while the margins were under pressure, we expect relief in the coming quarters. Importantly, PSUs did well and public sector banks reduced their losses. Looking at the results of ICICI Bank and Axis Bank, we also get the feeling that the NPA cycle will see a turnaround. Corporate deleveraging is steadily taking place and the government capex continues at a healthy pace. Thirdly, political equations for upcoming general election are getting clearer and the market certainly likes that. Lastly, I feel global equity markets will move up and rub-off on emerging markets. The dividend yield of Dow is better than the global treasury yield. ECB’s policy stance has also turned dovish. My Nifty target for 2019 is 13,000.

Which sectors in your view are ripe for investment in 2019?

I always prefer a bottom-up approach to stock selection. Many sectors and themes are looking attractive at this juncture. We like construction, discretionary consumption space, private banks (both retail and corporate funding ones), capital goods as a contra play and a host of individual names like Reliance Industries, Asian Paints, SBI, M&M, among others. 

What are you advising your clients at this juncture?

The first advice is to cut out the noise around you. In the present times, there is too much information thrown at you, most of which only confuses you further. Our assessment is that the next 3-4 years belong to financial assets and not physical assets. After the deep correction in 2018, the time is ripe to allocate more money to equities. If you have a higher risk appetite and are willing to stay invested for three years, then do add lots of mid-cap flavour to your portfolio. For investors in fixed income, go for accrual strategy at the shorter end of the curve.

In your view, will Indian markets outperform global markets hereon?

Last 10 years, both the US and Indian equity returns have been similar, if one considers low point of indices in 2008-09. In dollar terms, of course, India has underperformed. Going forward, it's difficult to say which market will outperform. But its safe to say that both will rally.

Should one invest in equity markets at this juncture and what is the best way to participate in the markets?

I am bullish for a 3-4 year perspective. Constructing a portfolio depends on many things that include risk appetite, return expectations, comfort, liquidity needs and so on. Depending on these, a mix of direct equity which includes midcaps, some diversified mutual funds and midcap focused portfolio managers would be best. An SIP is recommended as well; sectoral funds are not.

"Importantly, PSUs did well and public sector banks reduced their losses. Looking at the results of ICICI Bank and Axis Bank, we also get the feeling that the NPA cycle will see a turnaround. Corporate deleveraging is steadily taking place and the government capex continues at a healthy pace."

Raj Mehta, Fund Manager, PPFAS Mutual Fund

"Bottom-Up Stock Picking Makes Sense, More So In The Mid-Cap And Small-Cap Space"

Indian markets have underperformed on YTD basis so far. Will the performance reverse for the remaining part of the year?

With all the things happening globally, be it trade wars, border tensions, liquidity tightening or the interest rate hikes, it is difficult to say whether the market performance will reverse or not in this year itself. After saying this, an individual company's stock performance is determined by the earnings growth that it can deliver. So we believe in bottom-up stock picking and investing in businesses which can deliver a sustainable earnings growth is where we would like to put our money on.

What is your outlook on small-caps for 2019? What is your portfolio stance on small-caps and mid-caps?

We have already seen a wide divergence Bottom-Up Stock Picking Makes Sense, More So In The Mid-Cap And Small-Cap Space in performance of index versus the broader market i.e. mid-cap and small-cap stocks in 2018 and 2019 YTD. The index has given decent returns due to the performance of a select few stocks. Mid-cap and small-cap stocks had gone up too much for our liking in 2018 and they needed a breather which they got in 2018. We believe the valuations in this space are much better than what they were in 2018, but still, there are select few good quality companies that are at expensive valuations. Bottom-up stock picking makes sense, more so in the midcap and small-cap space.

What are the key triggers to be watched out for in the current market scenario?

General elections are something which everybody is waiting for. It does affect the sentiments in the market, but the real trigger for the market would be the earnings growth, which has been eluding the markets for 3-4 years now. The bad news and provisioning seem to be behind for the corporate and PSU banks (more so for corporate banks) which had struggled in the last few years. Also, there has been no private sector capex for a few years now. Once you see the capacity utilisations going higher for the companies, we could see the private capex cycle reviving and it will lead to another cycle of earnings growth for the infra and capital goods space.

What portfolio strategy can yield higher double-digit returns in 2019?

There is no particular strategy that works or does not work in the market. Patience is the key for holding on to the stocks you own and it is necessary to keep an eye on the valuations that you pay for the individual companies. If we keep the basic tenets of investing intact, then there is a lesser probability of going wrong. Not going wrong is even more important than missing some of the opportunities. The portfolio strategy of not compromising on either the quality of business, quality of management or the valuation that you pay for the company can yield returns superior than the market (not necessarily double digit).


TOP Sensex Wealth Creators

Global Market Outlook For 2019

The valuation gap between the emerging markets and their developed counterparts is expected to reduce in 2019. The year 2018 was more about US leadership in economic growth relative to other markets largely due to Trump’s fiscal stimulus. The year 2018 proved to be a challenging year for most asset classes as investors were faced with mounting uncertainties, including trade war concerns, Chinese growth slowdown and successive Fed rate hikes. After delivering a second straight year of growth exceeding the potential GDP gains amid higher interest rates in 2018, the growth in the global economy is expected to taper off slightly. JP Morgan Chase estimates global growth to come in at 2.9 per cent as against 3 per cent in 2018.

US       

The US economy delivered a robust growth of 3.1 per cent in 2018. In 2019, this growth is set to moderate to 1.8 per cent as fiscal, monetary and trade policies start tightening. December 2018 was the worst month for the US equities in 50 years. The current US expansion will become the longest expansion if it continues past July 2019. Trade war friction with China remains elevated, but it seems to be priced in by the markets. The IMF expects the US fiscal deficit to touch 5 per cent of GDP due to Trump’s fiscal stimulus in 2019, even though unemployment remains low. The Federal Reserve, which has been increasing interest rates, is expected to slow its pace of rate hikes amid slowing growth and inflation. The volatility is expected to spill over from 2018 into 2019 and the US equity markets are expected to deliver mid-single digit returns, as per the consensus. The peak of the economic boost from the fiscal stimulus will be seen in 2019. However, the stimulus will start becoming a drag on the economy in 2020, which is when a recession is feared. The trade war with China is expected to cool off as an agreement between the two countries looks likely.

Europe & Japan            

Europe witnessed a significant slowdown during the latter quarters of 2018 with growth coming in at 0.2 per cent for the quarter ended September 2018. The outlook does not appear rosy as political risks, muted earnings and economic momentum continues to be negative. Uncertainty looms large over how to manage Italy’s mountain of debt. Italy proposed a budget deficit of 2.4 per cent which is three times the amount targeted by the previous government. This led to a budget conflict with the EU. How this conflict plays out in 2019 remains to be seen. UK equities are in for difficult times as the country tries to negotiate an orderly exit from the European Union. The transient factors like drop in car production due to change in environmental regulation are expected to see a reversal. This could lead to a rebound in GDP from 2018 and into 2019.

Japanese growth could get a boost due to reconstruction efforts following a natural disaster in 2018, combined with Capital Goods Company Name Returns (%) 1 Year GMM Pfaudler Ltd. 64.81 Permanent Magnets Ltd. 64.31 Praj Industries Ltd. 61.20 3 Years HEG Ltd. 1570.35 Axtel Industries Ltd. 949.92 Permanent Magnets Ltd. 737.11 5 Years Permanent Magnets Ltd. 2273.88 Yuken India Ltd. 1555.48 GMM Pfaudler Ltd. 1158.28 Consumer Durables Company Name Returns (%) 1 Year Honeywell Automation India 28.19 KDDL 17.93 TTK Prestige 15.17 3 Years IFB Industries 183.29 Bajaj Electricals 175.21 Honeywell Automation India 160.72 5 Years Ducon Infratechnologies 2445.00 Johnson Controls - Hitachi Air Conditioning India 1146.87 IFB Industries 1056.29 construction work for the 2020 Olympics. The tight labour market could provide a boost to consumption as capital expenditure activity and wages see an increase. Decent corporate fundamentals, cheap valuations and political stability augur well for the Japanese markets.

Emerging Markets          

The growth momentum in China continued to weaken towards the end of 2018 as the world’s second biggest economy grapples with a slowdown. The GDP growth came in at 6.8 per cent in 2018. However, China’s debt continues to be more than 250 per cent of the GDP and the slowing property construction, poor demographics and trade war remain some of the key risks. China responded to downturns in the past with massive fiscal and credit stimuli. This time, the stimulus is unlikely to be as large and as effective. However, the work around the infrastructure focused Belt and Road initiative might GDP growth is expected to hover around 6 per cent in 2019.

The emerging markets were in the doldrums in 2018 on the back of rising interest rates, strengthening dollar and lingering trade tensions. However, most of these countries continued to maintain fiscal discipline which has set them up for exciting growth as these headwinds subside. A decisive transition to a quantitative tightening era could mean the end of the era of "winner takes all” for the US equities. The value looks set to perform growth and emerging markets should see gains at the expense of their developed counterparts. The stark valuation difference has led to Morgan Stanley’s base case forecast showing an 8 per cent price return for the MSCI EM index in 2019.

India’s economic growth is expected to remain healthy at around 7.5 per cent in 2019, driven by household consumption and some capital expenditure. The general election results due to be held in April and May could incentivize some pre-election spending promises. Fiscal discipline has largely been maintained by the current government. The current government’s re-election would cheer the market as they can expect more reformoriented policies. A revival in corporate earnings is widely expected, which would augur well for the markets.

"The emerging markets were in the doldrums in 2018 on the back of rising interest rates, strengthening dollar and lingering trade tensions. However, most of these countries continued to maintain fiscal discipline which has set them up for exciting growth as these headwinds subside."

Outlook on currencies        

The Fed rate hikes combined with the strong growth has led to dollar strengthening in 2018. The slower growth forecast for the US could mean slower pace of interest rate hikes by the Federal Reserve, which could lead to weakness in dollar. Morgan Stanley estimates the dollar to be 15 per cent overvalued against other major currencies. The unusually bullish sentiment about the dollar means that the trend looks set to reverse. The weakness in dollar could lead to strength in euro and yen.

The rupee witnessed high volatility in 2018 with a yearly high and low of Rs.74.49 and Rs.63.25 respectively. The biggest risk for the rupee in 2019 will be crude oil price. Real rates remain high at around 4 per cent and inflation is tepid at 2.3 per cent. This has built in expectation of a 50 bps rate cut in 2019. Any major shift in the crude oil prices could upset this expectation. The slower rate hikes by the Federal Reserve would make emerging markets more attractive for the investors. If inflows into these markets improve, it could augur well for their currencies, including the rupee. The rupee is currently at Rs.70/USD.

Interest rate outlook       

The central banks of different economies are in different stages of their policy cycle. The US is expected to slow its pace of rate hikes. The Bank of England’s policy tightening cycle is expected to continue. The European Central Bank is expected to begin its policy tightening cycle whereas the Bank of Japan is expected to continue its policy easing cycle. China and India could see monetary easing with interest rates in India expected to come down by 50 bps in 2019.

Crude oil      

Crude oil prices continue to remain volatile. Trade wars, Iran sanctions, OPEC production targets and the US pressure will continue to dictate oil prices. Bullish forecasts by Exxon Mobil Corp and Chevron Corp and the recently released Permian basin projections point to an increase in shale oil production in the US. Crude inventories increased to 7.3 million barrels in the week ended March 1, 2019, much higher than consensus expectations. This should keep oil prices benign, despite OPEC’s efforts to withhold supply.

Conclusion :-       

Looking at the global equity markets, we find that the growth concerns exist. Expect a slowdown in the GDP growth in the US and even in China. With two of the worlds foremost economies expected to witness slowdown in growth, investors can expect no great robustness in earnings in these countries and hence the expectations could be muted from these markets. Having said that, global investors have pumped in around $86 billion into emerging market stocks and bonds in 2019 so far, according to the data from Institute of International Finance. If anything, this action goes to show the risk-on mood of the global investors. The year 2019 could well be a year where the rupee and the other emerging currencies stabilise and gain against the USD. The crude oil prices are not expected to rise much even as the geopolitical tensions are getting factored in by the markets.

With earnings growth expected to gain momentum in 2019 and the interest rates expected to come down a little bit, equity as an asset class is expected to remain the top performer yet again. Investors should note that Sensex is the most expensive market globally and the earnings will have to do a serious catch up in order to remain attractive for the global investors.

Methodology

RANKING DSIJ 150 The Method & The Logic 

All-embracing extensive research has led to the selection of India’s top 150 companies which have created wealth for their promoters, shareholders and the society at large. We have applied a professional approach and method in this selection process as explained below- 

This year’s list marks Dalal Street Investment Journal’s seventh year of ranking of India Inc. and presenting the DSIJ 150. Ranking provides a universally accepted benchmark of performance with an objective analysis. What is also important is that with time, experience and changing conditions, the way one ranks should also undergo modification. These years have made us a little wiser and we have tweaked the methodology to make it more robust, as will be explained in the following paragraphs.

The study has culminated in the selection of the top 150 corporates of India Inc. and is a result of a meticulously laid out process. What follows is a detailed description of the various steps that have been followed in order to arrive at this most coveted list of toppers. For the purpose of this study, we began with all the listed companies of India. Since our objective was to focus on companies which have been super-achievers, a ‘short period’ study would not have been justified. Therefore, we spread our period of study over the past five years; we then narrowed down the list to include only those companies which have been listed for more than five years.

THE RATIONALE

A long-term study of five years tends to even out any aberration in the results of any particular year and helps in providing a fair idea of the long-term performance. A long-term study weeds out ups and downs which are a natural part of any business. Another reason why a five-year period or long-term study makes more sense is that many infrastructure companies such as power and road construction, and even the strategies of the service sector and manufacturing companies, get executed over a longer period before they begin to reflect on the financials of the company.

THE EXCLUSIONS

We have deliberately left out certain categories and companies from our study of Elite 100. These include- Banking and Non-Banking Finance Companies: The reason for excluding banking and NBFCs from our study is due to the difference in the nature of their business and the way they should be evaluated. Moreover, we will come out with a special issue on banking in the coming month wherein these companies will be comprehensively ranked.

THE PARAMETERS

Broadly speaking we have sought to  analyse and rank companies based on the following parameters:
Growth
Efficiency
Safety
Wealth creation

Growth:

The most important criterion for determining a company’s success is, naturally, the growth that it achieves over a period of time and also its capacity for growth in the future. Growth for a company can be defined in many ways. It could include anything and everything that goes to define a corporation as a whole. The most important and critical among these is the top-line which is defined by the sales or revenues of the company. The next growth factor is the operating profit which defines the operational performance of the company. Then comes the net profit which defines the eventual benefit to stakeholders either to be used this year in the form of dividend or can be invested to reap its benefit in the coming years. These reflect the profit and loss (P&L) side and capture the financial health of the company at three different levels.

Efficiency:

It is not only the growth that matters but also how effectively and efficiently this is achieved. In fact, the more efficiently an organisation uses its resources, the higher the value that it creates for its stakeholders. Having said that, we have measured efficiency based on the following factors.

1. Operating profit margins (OPM)
2. Net profit margins (NPM)
3. Return on capital employed (RoCE)

The OPM and the NPM together capture the efficiency of a company at the operating and the net levels, respectively. The RoCE, on the other hand, indicates how good a company is in utilising its funds. This is evaluated on a relative basis for the current year.

Safety:

Debt for a company is like a double-edged sword; if raised and utilised in an efficient manner, it can increase the shareholders’ return or else can turn into a burden. Therefore, we have used the debt-to-equity ratio to measure the safety of capital of the company’s shareholders. It actually reflects on how much of your money in terms of shareholder equity could come back to you in case of an eventuality after paying out the entire debt on the balance sheet.

Wealth Creation:

The ultimate objective of any organisation is maximising the shareholder’s return. Obviously, then, this had to be one of the criteria for our study. In order to evaluate companies on this front, we have looked at the movement in share prices over last one year after adjusting for splits and bonuses. The impact that this has had on market capitalisation is what has determined wealth creation by these companies for their shareholders. Last year has particularly been turbulent with companies seeing correction in market prices due to corporate governance issues, change in regulatory environment and change in accounting standards.

THE RANKING METHOD

After having laid out the data according to the various parameters as discussed above, we then embarked on the final step of ranking these companies. Although all the parameters described above play an important role for a company to excel, they differ by way of the importance of the quantum. We have carefully measured this requirement and accordingly assigned weights to each of the parameters. Even within that, companies in different stages of their evolution have been assigned weights according to the requirement. This led us to the creation of two broad categories. One, where we considered companies with a market capitalisation in excess of Rs.10,000 crore and second, where we considered companies with a market capitalisation of less than Rs.10,000 crore but exceeding Rs.1,000 crore. We have carefully assigned appropriate weightage to arrive at our final list and the rankings done thereafter. Accordingly, a higher weight has been assigned to the growth factor in case of companies with a market capitalisation of more than Rs.10,000 crore, the reason being that these companies are far ahead on the safety curve. They have been in the business for a greater duration and have achieved critical mass by now. What is important in their case is the growth factor which will propel them into the next orbit. Considering that leverage plays a higher role for companies with a market cap of less than Rs.10,000 crore, a higher weightage has been assigned for the safety parameter for Elite 100. With improvement in technology and growth, we expect companies to sweat their assets efficiently. Super 50 are expected to lead in the same to drive bottomline growth. Hence, Super 50 companies have been assigned a higher weightage for their efficiency parameter in comparison to the Elite 100 companies. On the other hand, the wealth creation parameter computed using shareholder returns carries the same weightage in both the categories.

Based on all these factors, a final composite ranking of companies in both the categories was arrived at. This gave us a list of the top 50 companies in the first category (market capitalisation in excess of Rs.10,000 crore), which is our ‘Super 50’ club. The top 100 companies in the second category make up our ‘Elite 100’ group.

As mentioned at the outset of this exercise, it has been our perpetual endeavour to research and provide the best of the best to our readers and patrons. We at DSIJ are committed to continue improving upon our methodology and research metrics to further strengthen the quality of the results. In the pages that follow we bring to you the DSIJ list of ‘Super 50’ and ‘Elite 100’ companies. We hope this compilation helps you put a finger on the truly ‘valuable’ shining stars of India Inc. Although these companies have performed superbly over the last five years and rightly deserve a place in DSIJ 150, these are not our recommendation. Nonetheless, these companies can be looked at for investment after applying your own judgement.

RANKING DSIJ 150 The Method And The Logic

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